DBRS Confirms Veridian Corporation at “A” with a Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Veridian Corporation (Veridian or the Company) at “A” with a Stable trend. The confirmation is based on the stability of Veridian’s regulated electricity distribution business in Ontario, as well as its strong key credit metrics. DBRS expects the Company to continue to fund future growth investments in a prudent manner in order to avoid material structural subordination risk. DBRS notes that the senior unsecured debt at Veridian ranks junior to the senior unsecured debt at Veridian Connections Inc., the Company’s primary operating subsidiary. A negative rating action is likely to occur should the senior unsecured debt at Veridian account for more than 10% of total debt, excluding shareholder debt, at the Company (approximately 8.6% as at December 31, 2016).

On April 28, 2016, Veridian announced its intention to investigate a merger with Oshawa Power and Utilities Corporation (Oshawa PUC) and Whitby Hydro Energy Corporation (Whitby Hydro). While Oshawa PUC announced in March 2017 that it would not proceed with due diligence and review of the possible merger, DBRS believes that a merger between Veridian and Whitby Hydro to create a new, larger utility of around 162,000 customers could still have a modestly positive impact on the Company. The transaction is expected to create meaningful synergetic benefits, which, under the current regulatory regime, would be to the benefit of the shareholders for a period of up to ten years. However, DBRS notes that this is partly offset by the integration risk associated with the merger and early rebasing risk; if a rate application is required before the ten-year term, synergetic benefits would be less than projected.

Veridian’s business risk profile continues to be supported by the reasonable regulatory regime under the Ontario Energy Board. DBRS notes that while the Company plans to develop opportunities in the non-regulated space, such as renewable generation supported by long-term power purchase agreements, earnings from this segment are expected to remain immaterial at less than 5% of consolidated earnings over the next ten years (less than 1% in 2016). Veridian’s financial risk profile remained strong in 2016, with all key credit metrics supportive of the current rating category. While DBRS expects Veridian’s financial ratios to deteriorate moderately as the Seaton Transformer Station project (estimated cost of $46 million) begins later this year, the Company’s key credit metrics are expected to remain commensurate with the current rating. DBRS additionally notes that since around 46% of total debt outstanding as at December 31, 2016, was owed to the Company’s shareholders, Veridian continues to have significant financial flexibility for the current rating category.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), which can be found on dbrs.com under Methodologies.